The Green Organic Dutchman Holdings Ltd. OTC:TGODF;
Company Update Updating model + PT after visit to Valleyfield
Brett M. Hundley, CFA | Senior Analyst | (804) 939-5268 | bhundley@seaportglobal.com Luke Perda | Associate Analyst | (804) 939-5264 | lperda@seaportglobal.com September 23, 2019
Summary: Last week, we visited TGOD's location under construction in Valleyfield, QC, while also getting a chance to meet with company management. We gained added visibility on company-wide production expectations, alongside specific updates related to forward margin drivers and commercial business efforts.
As a result, we lower forward sales expectations, as production volumes are not anticipated to materialize as quickly as we had previously anticipated; that said, we continue to feel good about the company's ability to methodically scale forward production while driving an attractive margin profile in 2021 and beyond. As well, within a country that continues to limit overall marketing capabilities and thus brand differentiation/development, we like that the organic segment can effectively become the TGOD brand.
We stay positive on the company's stock, but our PT drops to $6 from $8 as a result of our forward revenue revisions. Highlights: Valleyfield tour + meetings. Last week, we visited TGOD's location under construction in Valleyfield, QC, while also getting a chance to meet with company management. The trip was helpful, insofar as helping to shed additional light on forward production expectations, while also reinforcing previously held views on potential margin structure and commercial efforts.
Lowering estimates and PT. Company-wide production will not progress as quickly as that assumed in our previous model. Thus, we are updating expectations to include lower forward volumes into 2021. To be clear, we continue to believe that management can execute on scaling its organic business, however the pacing of this effort will be behind our previous view. Management has been very thoughtful about slowly ramping production in Hamilton, and we think that its plans at Valleyfield are appropriately measured, as well, taking into account potential operational and commercial hazards. We concluded our trip feeling good about TGOD's ability to deliver an attractive forward margin structure, particularly in 2022/23. Net/net, our FY2021 EBITDA estimate is now $98.7MM, down from $130.6MM previously.
Our price target on the stock is now $6 relative to $8, previously. Thoughts. Despite production volumes not materializing as quickly as expected, we believe that the company is appropriately building distribution in key regions, and we continue to like its exclusive partnership with Stillwater (private) as the Canadian market opens up to value-added products in 2020.
From an operational standpoint, we remain confident that TGOD can deliver an industry-leading margin structure in coming years. Valleyfield is the first LP site that we've seen that has an electric power substation on the premises (TGOD anticipates significant power savings across its entire business). Equipment customization, rainwater collection, and a proprietary soil approach are further elements of a targeted cash cost structure that could ultimately approach $1/g. Commercially, announced processing arrangements appropriately cover the company on ~50% of its forward production. As well, in a market environment where marketing efforts are constrained, we like that the organic segment can effectively become the TGOD brand. Given its potential scale, so long as budtenders educate consumers on the availability of conventional and organic cannabis, TGOD's effective monopoly on the latter essentially serves as its branded marketing approach, in our view.
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